Update on Indian Economy, January 2013

7/29/2019 Update on Indian Economy, January 2013

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Update on Indian Economy

January 2013

Economic Snapshot

Item Units December November December (%) Change

Contents 2012 2012 2011 [1]/[2] [1]/[3]

[1] [2] [3] [4] [5]

-Editorial WPI -Index* 1993-94=100 168.8 168.7 157.4 0.1 7.2

-Capital Market WPI -Inflation** Per cent 7.2 7.5 9.1

-Other Markets Week ended (Nov 2012) (Oct. 2012) (Nov 2011)

-Important Policy IIP (93-94=100) 2 months lag 171.3 163.6 158.1 4.7 8.3

Pronouncements (Oct 2012 (Sept 2012) (Oct 2011)

INR / US$ Month End 54.98 54.2853.25 1.29 3.25

M3 Rs. '000 Cr. 7986.74 7947.62 7073.26 0.49 12.81

[i] Agg.Deposits Rs. '000 Cr. 6882.96 6882.47 6100.8 0.01 12.82

[ii] Currency Rs. '000 Cr. 1103.78 1065.15 972.46 3.63 13.50

(Outstanding as on) (14.12.2012) (02.11.2012) (02.12.2011)

Call Money Weighted Average % 7.97 8.03 8.54 - -

(Lendings) Week ended (14.12.2012) (09.11.2012) (02.12.2011)

Source: RBI Weekly Statistical Supplement December 28, 2012 & Economic & Political Weekly December 29, 2012

*All Commodities. **Over the year.

EditorialA) Domestici) IIP Leaps To 15-Month High At 8.2%

Indias industrial output leapt to a 15-month high in October, the swing to positive territoryoffering a brief respite to policymakers battling a barrage of mostly grim economic newseven though experts and the government played down the jump. Government data onWednesday showed industrial output as measured by the Index for Industrial Production (IIP)rose 8.2% year-on-year in October, almost double the expectations and compared with a0.73% dip in September.

The October bounce, mainly on the back of a strong manufacturing sector growth, especiallyof consumer durables and capital goods, helped lift industrial output for the April-Octoberperiod as a whole to positive territory at 1.2%. Without it, the seven-month combined output

growth number would have been negative or at best flat. The September figure was reviseddownwards from a 0.4% contraction to a 0.73% fall while the July and August numbers toowere revised to -0.06% and 2.29% from -0.17% and 2.24%, respectively.

The government refrained from reading too much into the October figure, which expertscalled a statistical freak brought about by a low base and seasonal factors. A separate releaseshowed retail inflation had climbed to 9.9% in November from 9.75% in October, and thetwo data points read together all but doused hopes of any immediate cut in interest rates. Keystock market indices, rather than rally on the unexpected IIP performance, closed 0.16%down at 19,335 points.

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ii) India Inc's Sales Growth Slips, Other Income Grows: RBI report

Indian companies recorded a decelerating sales growth rate in the first half of current fiscal,while it was 'other income' helping them post a decent growth in net profits.

According to the analysis, published in latest monthly bulletin of RBI, the sales of non-financial private sector companies grew by 12.3 per cent in the first half of 2012-13, downfrom 17.3 per cent in the preceding six-month period. Besides, the companies' operatinggrowth posted only a modest growth, but their 'other income' helped them register asignificant growth in net profits.

While there was a modest growth in operating profits, more significantly net profits went uppartly contributed by 'other income', reversing the declining trend observed in the previoustwo half years.

The report, which is part of a series of articles putting forth views of RBI's research staff onvaried issues, analysed the performance of private corporate business sector during the firsthalf of 2012-13 based on financial results of 2,832 listed non-government and non-financialcompanies.

The deceleration in sales growth was broad-based across manufacturing, IT and non-ITservices sectors. Sales growth (Y-o-Y) of the corporate sector decelerated further to 12.3 percent during H1, 2012-13 (April-September) from 17.2 per cent in H2, 2011-12 (October-March).

In line with the sales, the expenditure on major heads such as consumption of raw materials(CRM) also grew at slower rates, resulting in a modest growth in operating profits during theApril-September period of the current fiscal.

The report also observed that large companies (annualised sales higher than Rs 1,000 crore)recorded relatively higher growth in sales and operating profits as well as higher profitmargins than their smaller counterparts.

However, sales of large companies also moderated over time and recorded the lowest growthin post-crisis period during first half of 2012-13.With moderation in the growth of interestexpenses and continued support from 'non-core' other income, net profits also went up,reversing the declining trend observed in the previous two half years. While the net profitmargin of the IT sector could be maintained, the non-IT services registered a fall in margin.

Performance of smaller companies was relatively weak as compared with larger companies.The report covered performance of companies from sectors like textiles, pharmaceuticals andmedicines, cement and cement products, iron and steel, motor vehicles and other transportequipment, construction and machinery.


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iii) Government Approves 14 FDI Proposals Worth Over Rs 1,300 crore

The government said it has approved 14 FDI proposals worth about Rs 1,311 crore includingthat of Hindustan Port Ltd. The proposal of Mumbai-based Hindustan Port Ltd to inductforeign funds worth Rs 440 crore for investment in downstream companies was among those

cleared by FIPB.

The Foreign Investment Promotion Board (FIPB), headed by Economic Affairs SecretaryArvind Mayaram, has also allowed pharma firm Aanhaneya Lifecare to raise funds worth Rs405 crore through issue of foreign currency convertible bonds. Besides, the board hasallowed Bangalore-based Syngene International to induct foreign equity of Rs 125 crore.

US-based Gavis Pharma LLC can also invest Rs 73.75 crore in an Indian company engagedin the business of manufacture of injectable products. Other major proposals which wereapproved by the FIPB include Excedo Reality Fund-I to accept NRI investment worth Rs 210crore, and that of Punjab-based pharma company Saurav Chemicals Ltd to issue fresh equity

shares valued Rs 14.85 crore to foreign company. Other proposals approved include that ofOrdain HealthCare Global for acquisition of manufacturing facility for its group pharmacompany and that of Arshiya International to issue warrants.

FIPB has deferred six and rejected three proposals. The proposals which were deferredinclude that of Mahindra & Mahindra Ltd to provide service support for radar systems anddefence electronic systems. Those rejected include proposal of Mumbai-based FullifeHealthcare for induction of foreign equity.

iv) India Economic Growth Expanded At Faster Rate Than China in Oct-Dec qtr:HSBC

Economic growth in emerging markets slightly improved in the October-December quarterand among BRIC nations, India economic growth expanded at a faster rate than China, anHSBC survey has said. The combined growth of manufacturing and service sectors of themajor BRIC (Brazil, Russia, India and China) economies registered expansion in the fourthquarter of 2012, but is still well below the pre-crisis level.

The HSBC Emerging Markets Index (EMI) rose to 52.9 in the fourth quarter of 2012, from52.2 in the July-September period, representing the first upward movement since the firstquarter of 2012 (January-March).

The mild rebound in growth was mainly led by an expansion from the manufacturing sectoras although the service sector witnessed an improvement over the previous quarter, itsoutlook remains below-par. Although hardly buoyant economic growth, recent improvementsare encouraging, especially as complemented by encouraging signs for the early months of2013.


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The HSBC EMI, which is based on PMI (Purchasing Managers' Index) surveys conductedacross the emerging markets, is above the 50-mark that differentiates growth from slowdown.Among four largest emerging economies, Brazil posted a return to growth following theprevious quarter's stagnation, while Russia overtook India to post the best rate of outputgrowth, HSBC said, adding that China saw its growth improve, but remain relatively weak,

while India posted a solid rate of expansion.

While China has yet to resume the pace of growth it once enjoyed, this enhancedgravitational pull is driving a 'Great Rotation' of economic activity from the deleveraging oldworld to the dynamic new world, according to the report.

New export orders for emerging markets manufacturers fell for a fourth consecutive quarter,reflecting weak demand from advanced economies, notably those in the euro-zone. However,total new orders in emerging economies increased in the final quarter of 2012.Much of thegrowth is domestic as export orders are still contracting, although not at the worrying paceseen mid-year.

Looking ahead, the 12-month outlook for service providers across the BRIC economiesimproved slightly on the previous quarter. Optimism was led by Brazil's service providers,followed by India. Meanwhile, Russian and Chinese service providers remained relativelysubdued in their expectations for the coming year.

The Emerging Markets Index may not be particularly strong at the moment but China is setto have a bigger influence than either the US or Europe on the economic destiny of emergingmarkets.

v) GAAR Likely To Be Deferred By 2 Years

Giving certainty to foreign investors, the government is likely to put off the controversialgeneral anti avoidance rules (GAAR) by at least two years. The decision, likely to be a keyannouncement of Budget 2013-14 is the lynchpin of a series of measures to help reviveinvestments from abroad in the economy, especially at a time when the government has littlespace for fiscal sops. The step underscores finance minister P Chidambarams announcementthat he would like to once again underscore the crucial importance of FDI and FII.

Investors have been wary of the Indian economy ever since proposals relating to GAAR andretrospective taxation were announced. Deferring roll out of GAAR would give a lot moretax certainty to them, which is crucial for reviving growth.

The government is banking heavily on foreign investments as it tries to pull out of a sub-sixper cent growth trajectory and fund a current account deficit that touched 5.4 per cent of theGDP in the second quarter of the fiscal.

An expert committee headed by tax expert Parthasarathi Shome had earlier suggestedpostponing the implementation of the proposal aimed at preventing tax avoidance to 2016-17but the revenue department had contested it saying the period would too long. Shome is nowthe adviser to Chidambaram.


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The government is also likely to accept the panels suggestion that GAAR should kick inonly in cases where the tax benefit is over Rs 3 crore. The finance minister had last monthsaid the proposed amendments to GAAR had been submitted to the Prime Ministers Office,which would take a final call on the issue. Announced as part of Budget 2012-13 by formerfinance minister Pranab Mukherjee, GAAR was intended to check tax avoidance by multi-

national firms that use tax havens to route their investments into India. But the controversialtax law had raised the hackles of foreign as well as domestic investors who felt that it maygive unrestrained powers to tax authorities and was put on hold till April 1, 2013.Registration by FIIs with the market regulator had fallen for the first time in a decade incalendar year 2012.

B) Internationali) The US Fiscal Cliff - Crisis Averted?

Markets are breathing a sigh of relief that a partial deal has been reached in the US to avertthe "fiscal cliff" - the expiry of tax cuts dating from the George W. Bush era coinciding with

mandated spending cuts to areas such as defence and education. This threatened to drasticallyreduce economic growth, possibly even plunging the US into recession.

The recent agreement has addressed the taxation side of this equation. The compromisebetween Democrats, who wanted to force higher earners to pay more taxes to plug the gap,and Republicans, who didn't, was to extend the tax cuts for 99% of the population. Therewere also some tax rises for very high earners.

However investors shouldn't become complacent. Further negotiations are set to addressspending cuts (which have been postponed by two months) and the looming problem of the'debt ceiling', a legal cap on borrowing imposed by the US Congress. It is likely thegovernment will run up against this by the end of February.

Although the outcome of the most recent negotiations shows a will to compromise by bothsides, further agreements on these harder decisions are necessary. Notably, the last timenegotiations over the debt ceiling took place in 2011 markets fell sharply as politicalbrinkmanship threatened to trigger a default of the government's payment obligations. It maybe the market rally is a little premature, perhaps exacerbated by thin market volumes as manytraders are yet to return from the Christmas break.

Of course the wider issue, massive debt combined with huge annual budget deficits, remainsunresolved. Averting the fiscal cliff is ultimately a case of kicking the can down the road, asthe US continues to spend beyond its means. Whilst it is no-one's interests to stall economicgrowth with large tax hikes and spending cuts in one go, sooner or later the US is going tohave to reduce its deficits drastically in the interests of longer-term economic stability.

ii) World Economy Grew at Weaker Pace in 2012

The world economy grew at a significantly weaker pace in 2012 and is not likely to pick upenough in the next two years to recover jobs lost during the global financial crisis, the UnitedNations says.


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The UN's report on the World Economic Situation and Prospects 2013 said that with existingpolicies and growth trends it may take at least another five years for Europe and the UnitedStates to make up for the job losses caused by the 2008-2009 recession.

According to the report, world economic growth is expected to reach just 2.2 per cent in 2012

- a drop from the 2.5 per cent predicted in June - and is forecast to remain "well belowpotential" at 2.4 per cent in 2013 and 3.2 per cent in 2014.

Weaknesses in the major developed economies are at the root of continued global economicwoes. Worsening of the euro area crisis, the 'fiscal cliff' in the United States and a hardlanding in China could cause a new global recession."

Each of these risks could cause global output losses of between 1 and 3 per cent. The reportsaid the US economy "weakened notably" during 2012 and growth prospects for 2013 and2014 remain sluggish. The "already anaemic pace of 2.1 per cent in 2012" is forecast to dropto 1.7 per cent in 2013, and then rise to 2.7 per cent in 2014.

Several European economies and the euro zone as a whole are already in recession, andunemployment in the euro zone increased to a record high of almost 12 per cent this year.The UN said output in Germany, Europe's largest economy, has slowed significantly whileFrance's economy is stagnating. According to the UN, the economic woes in Europe, the USand Japan, where deflationary conditions continue to prevail, are spilling over to developingcountries which are seeing weaker demand for their exports and heightened volatility incommodity prices and the flow of capital.

The largest developing economies including China, India and Brazil, are also facing home-grown problems including weakening investment, excess production, and structuralbottlenecks, the report said.

Africa remains a bright spot, despite numerous challenges including conflicts, with the UNforecasting only a slight drop in economic growth from 5 per cent in 2012 to 4.8 per cent in2013.

iii) Japan Approves $224B Stimulus Package

The Japanese Cabinet approved a fresh stimulus package of more than 20 trillion yen ($224billion), aiming to lift the economy out of recession and create 600,000 new jobs.

Prime Minister Shinzo Abe announced the decision at a news conference where he said thenew measures were intended to add 2 percent to Japans real economic growth.

Abe urged the central bank to move more aggressively to encourage lending and meet a clearinflation target to break out of the economic doldrums that have plagued Japan for twodecades. Abe took office late last month after a parliamentary election victory by the LiberalDemocratic Party, which is touting public works spending and subsidies to strategicallyimportant sectors as part of its plan to revive the economy.


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Abe, who also served as prime minister in 2006-2007, has vowed to make reviving theeconomy his top priority, promising support both to small businesses and big industries suchas the auto sector. The spending package includes 10.3 trillion yen ($117 billion) in extraoutlays by the central government. Abes administration is pledging to spend 19 trillion yen($216 billion) through 2015 in support for reconstruction of the coastal areas devastated by

the March 2011 disasters.

The stimulus deal, which will be the basis for a supplementary budget for the remainder ofthe fiscal year through March 31, required wrangling over tax reform and other issues withthe Liberal Democrats coalition partner, the New Komeito. It also includes plans a request toraise military spending by 100 billion yen ($1.1 billion) from the 4.6 trillion yen ($52.3billion) budget last year, the first such increase in a decade.

On the economic front, Abe has urged Japans central bank to do whatever it takes to meet aninflation target of 2 percent to counter a persisting cycle of sinking prices and weak demand.The change of administration has raised hopes that Abes more aggressive approach might

help Japan escape recession.

iv) U.K. Keeps Its Key Rate Unchanged Amid Concerns About High Inflation

The Bank of England left its monetary levers untouched as concerns about persistently highinflation trump signs of a renewed economic downturn.

The U.K.'s central bank said its Monetary Policy Committee left the BOE's benchmarkinterest rate at 0.5% and the limit for its bond-buying stimulus program at 375 billion ($600billion) following its two-day policy meeting, minutes of which will be published Jan. 23.Sterling and U.K. government bonds were broadly unmoved.

The MPC enters 2013 facing a similar mix of stubbornly high inflation and weak growth thatdogged its decisions in 2012.Business surveys and economic data published in recent weekssuggest the U.K. economy contracted in 2012's final quarter and will probably struggle togrow in the first few months of 2013, raising the specter of three recessions in relativelyquick succession. A recession is typically defined in the U.K. as two consecutive quarters ofshrinking gross domestic product. The nation has experienced two such periods since 2008.

Consumer confidence declined in December, while a quarterly survey of finance chiefs atU.K. firms published by business-services firm Deloitte LLP found executives plan to keephoarding cash this year, stymieing hopes for an investment-led recovery. Recent trade datashowed Britain's economy is still suffering from the effects of the euro-zone downturn, whileat home demand is being hurt by a continuing budget squeeze by Prime Minister DavidCameron's governing coalition.

Economists on average expect the U.K. economy to have shrunk 0.1% in 2012 and estimateit will grow 1.1% in 2013, according to a range of independent economic forecasts compiledby the U.K. Treasury. The first official estimate of 2012 gross domestic product is scheduledto be released on January 25.


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Capital Market Review

The month of Dec 2012 saw the Nifty trading in a tight range between the 5823-5965 levels.M-o-M, the Nifty gained 0.43%. FIIs were reported as net buyers of Rs. 16250 cr in Dec2012 in the cash market (In November, they were net buyers of Rs. 9718 cr).

Indian G-Sec bond yields ended lower by 12 bps at 8.05% at the end of December 2012 overNovember. Yields closed at the lowest level on a closing basis on the last day of the month.India's benchmark 10-year bond yields fell to a five-and-a-half month low, on quarter-endbuying and as the government's move to sell more Treasury bills was seen as reducing theneed to sell longer-dated paper. The government will sell Rs 1.4 trillion ($25.5 billion) oftreasury bills between January and March. The 10- year yield fell for the first time in fouryears in 2012 after retreating 51 basis points, helped largely by the central bank's steep cutsin the cash reserve ratio and its bond purchases in open market operations. The RBI has heldinterest rates steady since its 50 basis point cut in April, although it has cut the CRR by 175bps and bought bonds to reduce a persistent cash deficit in 2012.

December November December November (%) Change

2012 2012 2011 2011 [1]/[2] [1]/[3] [2]/[4]

Major Indices [1] [2] [3] [4] [5] [6] [7]BSE Sensex Close 19,426.71 19,339.90 15,454.92 16,123.46 0.45 25.70 19.95

(31.12.2012) (30.11.2012) (30.12.2011) (30.11.2011)

Monthly High 19,486.80 19,339.90 15,175.08 17,569.53 0.76 28.41 10.08

(06.12.2012) (30.11.2012) (20.12.2011) (08.11.2011)

Monthly Low 19,229.26 18,309.37 15,175.08 15,695.43 5.02 26.72 16.65

(13.12.2012) (16.11.2012) (20.12.2011) (25.11.2011)

S&P CNX Nifty Close 5905.10 5879.85 4624.30 4832.05 0.43 27.70 21.68

P/E Ratio : BSE 30 17.50 17.40 16.40 17.10 0.57 6.71 1.75

FII Investments (Equity+ Debt)Inflows Rs. Cr. 92862.09 66814.60 92019.50 62296.10 38.98 0.92 7.25

Outflows Rs. Cr. 66070.00 56945.90 70147.20 65559.20 16.02 (5.81) (13.14)

Net Rs. Cr. 26792.20 9869.30 21872.50 (3263.20) 171.47 22.49 (402.44)

Cum. Net InvUS$ Mn. (Month End) 158858.59 153953.59 127843.61 123648.80 3.19 24.26 24.51

The cumulative investment by FIIs stood at US$ 158.86 billion in December 2012, and thisreflected a decrease of US$ 3.09 billion over the previous month.

Other MarketsDebt MarketDuring the month of November 2012 there were 14 corporate debt issues for a total amountof Rs.8,073.2 crore. Some of these issues are recorded below :

Name of the IssuerDuration

(yrs)Rating

Amount(Rs. Crore)

Type ofInstrument

1. Housing Development FinanceCorporation Ltd.

3 AAA 560 Bonds/NCD

2. Steel Authority of India Ltd. 5 AAA 500 Bonds/NCD

3. Prime Focus Ltd. 5, 6 BBB 192.5 Bonds/NCD

4. Rural Electrification Corporation Ltd. 7, 10 AAA 2549.5 Bonds/NCD


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Name of the IssuerDuration

(yrs)Rating

Amount(Rs. Crore)

Type ofInstrument

5. LIC Housing Finance Ltd. 2 AAA 200 Bonds/NCD

6. Hindustan Petroleum Corporation

Ltd.

3 AAA 545 Bonds/NCD

7. Andhra Pradesh Expressway Ltd. Various AAA(SO) 476.2 Bonds/NCD

8. L&T Infrastructure Finance Co. Ltd. 5 AA+ 250 Bonds/NCD

9. L&T Seawoods Pvt. Ltd. 2, 8 AA+(SO) 50 Bonds/NCD

10. L&T Finance Holding Ltd. 1.3, 1.5 AA+ 100 Bonds/NCD

11. EXIM Bank 3 AAA 150 Bonds/NCD

12. National Bank for Agriculture andRural Development (NABARD)

3 AAA 1000 Bonds/NCD

13. Oriental Bank of Commerce 10 AA+ 1200 Bonds/NCD

14. Volkswagen Finance Pvt. Ltd. 2, 3 AAA 300 Bonds/NCD

(Sources: Credit Analysis & Research Ltd. December 2012)

Call Money MarketThe weighted average call money rate on December 14, 2012 in respect of borrowings /lendings ranged between 7.97% as compared to the rates of 8.66% on December 16, 2011(i.e. a year ago) reflecting that there was softening of interest rates. The average dailyturnover in the call money market was Rs.112.0 billion for the week ending December 14,2012 and this daily turnover increased to Rs.149.9 billion on December 21, 2012.

Foreign Exchange MarketThe exchange rate (RBI reference rate) on December 21, 2012 was Rs.55.09 per US dollar ascompared to Rs.54.63 per US dollar on December 17, 2012, that is, a week ago; this reflected

a nominal depreciation of the rupee vis-a-vis US dollar. Further, the six month forwardpremia was 6.57% on December 21, 2012 as compared to a premium of 6.52% on December17, 2012 (a week ago), which reflects that supply of dollars is likely to become relativelyhard in the forthcoming weeks. The market rate (buying) was Rs.54.98 per US dollar onDecember 31, 2012. The foreign currency assets were US$ 261.95 billion on December 21,2012 and inclusive of gold and SDRs and the reserve position in the Fund, the foreignexchange reserves aggregated to US$ 296.54 billion. From end-March 2011, the foreignexchange reserves registered increase of US$ 2.14 billion upto December 21, 2012.

Important Policy Pronouncements

i) Summary of RBI Mid-Quarter Monetary Policy Review: December 2012

Monetary and Liquidity Measures

On the basis of the current macroeconomic assessment, it has been decided to:

keep the cash reserve ratio (CRR) of scheduled banks unchanged at 4.25 per cent of theirnet demand and time liabilities; and

keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 8.0per cent.


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Consequently, the reverse repo rate under the LAF will remain unchanged at 7.0 per cent,and the marginal standing facility (MSF) and the Bank Rate at 9.0 per cent.Introduction

2. Since the Second Quarter Review (SQR) of October 2012, the global economy has shown

some signs of stabilisation although the situation remains fragile. While activity is picking upin the US and the UK, near-term prospects in the euro area are still weak. Moreover, there isno clarity as yet on how the US fiscal cliff might be managed. While several emerging anddeveloping economies (EDEs) are gradually returning to higher growth, weak externaldemand and contagion risks from advanced economies (AEs) render them vulnerable tofurther shocks.

3. On the domestic front, there are some incipient signs of pick-up though growth remainssignificantly below its recent trend. Also, though consumer price inflation remains stubborn,the pace of moderation in wholesale price inflation has been faster than anticipated. Withfood and manufacturing prices expected to edge down further, inflationary pressures may

ease somewhat in the coming months.

Global Economy

4. Since the SQR, global activity has remained sluggish, but country growth trajectoriesappear to be de-coupling. In the US, the revised GDP estimates for Q3 of 2012 indicate that apick-up in growth is underway, supported by rising non-farm payroll employment, homesales and house prices. In order to support a stronger recovery, the Fed continued itsquantitative easing, and announced further expansion through purchase of longer-termtreasury securities. In contrast, euro area growth contracted for a second successive quarter inQ3, and retail sales have been declining at a faster pace in Q4. In Japan, GDP growthcontracted in Q3, triggering a fresh dose of fiscal stimulus. Overall, the global purchasingmanagers index (PMI) for November points to acceleration, with the all-industry indexrecording an eight-month high. International energy and non-energy commodity pricessoftened in November for the second month in a row, suggesting lower inflationarypressures.

Domestic Economy

Growth

5. GDP growth in Q2 of 2012-13 at 5.3 per cent was marginally lower than 5.5 per cent inQ1. However, there are some indications of a modest firming up of activity in Q3. Industrialactivity rose sharply in October but this is, in large part, due to a low base and festival-relateddemand which propelled the growth of both consumer durables and non-durables into doubledigits. Significantly, capital goods production recorded a growth of 7.5 per cent after 13successive months of decline. The manufacturing PMI rose moderately in November as orderbook volumes expanded. While the services PMI declined from a month ago, expansion innew business and order book volumes suggests positive sentiment about increasing activityin the months ahead. In the farm sector, rabi sowing coverage is expanding steadily,improving the prospects of agricultural growth.


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Inflation

6. Headline WPI inflation edged down to 7.2 per cent in November, mainly owing tosoftening of prices of vegetables, minerals and fuel. On the other hand, prices of cereals and

protein-based items such as eggs, fish and meat firmed up further. Significantly, core (non-food manufactured products) inflation eased, aided by decline in prices of metals, cement andchemicals. The seasonally adjusted three-month moving average annualised momentumindicator also points to ebbing of inflationary pressures. However, in striking contrast towholesale inflation developments, retail inflation remained elevated. The new combined(rural and urban) CPI (Base:2010=100) inflation increased in November, reflecting sustainedfood inflation pressures, particularly in respect of vegetables, cereals, pulses, oils and fats.The non-food component of the index also suggested persistent inflationary pressures.Monetary and Liquidity Conditions

7. While money supply (M3) growth remained below its indicative trajectory because of

lower deposit growth, non-food credit growth rose above the indicative trajectory of 16 percent suggesting some pick-up in economic activity. Liquidity conditions have remained tightin Q3 due to large government balances with the Reserve Bank and the widening wedgebetween deposit and credit growth. With a view to containing the liquidity deficit atreasonable levels, the Reserve Bank conducted open market operations (OMOs) onDecember 4 and 11, injecting primary liquidity of `232 billion. Accordingly, money marketrates remained close to the repo rate.

External Sector

8. With the step-up in oil imports persisting despite the moderation in crude prices, thecumulative trade deficit for April-November widened from its level a year ago indicatingsignificant risks to the balance of payments from the adverse external environment. Even ascapital inflows improved compared to Q2, there were downward pressures on the rupeereflecting the large trade and current account deficits.

Outlook

9. Lead indicators point to a modest firming up in the momentum of global growth over therest of 2012 and in 2013 if there is firm policy action in the euro area and the US. Thebiggest risk to the outlook stems from political economy considerations that could impede,delay or erode resolute policy action. The consequences could be deepened financial stressand heightened risk aversion. For EDEs, the threat of spillovers remains significant in viewof the depressed outlook for global trade and volatile capital flows. Although inflationpressures appear to be moderating, elevated food and commodity prices remain contingentrisks, especially for EDEs facing domestic supply constraints.


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10. On the domestic front, GDP growth is evolving along the baseline projection of 5.8 percent for 2012- 13 set out in the SQR. The recent policy initiatives by the Government andfurther reforms should help to boost business sentiment and improve the investment climate.As regards inflation, excess capacity in some sectors is working towards moderating coreinflation. Furthermore, the easing of international commodity prices, particularly of crude, is

expected to impart some softening bias to the evolving inflation conditions if it is not offsetby the impact of rupee depreciation. The Reserve Bank is closely monitoring the evolvinggrowth-inflation dynamic and will update the formal numerical assessment of its growth andinflation projections for 2012-13 as part of the third quarter review in January 2013.

Guidance

11. Headline inflation has been below the Reserve Banks projected levels over the past twomonths. The decline in core inflation has also been comforting. These emerging patternsreinforce the likelihood of steady moderation in inflation going into 2013-14, thoughinflation may edge higher over the next two months. In view of inflation pressures ebbing,

monetary policy has to increasingly shift focus and respond to the threats to growth from thispoint onwards. Liquidity conditions will be managed with a view to supporting growth asstated in the SQR, thereby preparing the ground for further shifting the policy stance tosupport growth. Overall, recent inflation patterns and projections provide a basis forreinforcing our October guidance about policy easing in the fourth quarter. However, risks toinflation remain and accordingly, even as the policy emphasis shifts towards growth, thepolicy stance will remain sensitive to these risks.

Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Nov-12

M3 (Rs. Crore) 3,310,278 4,006,722 4,764,019 5,599,762 6,499,490 7,359,200 7,986,740M3 (%) : Change 21.27 21.04 18.90 17.54 16.07 31.42 22.88

WPI (Index) All Commodites$$ 210 225.7 227.3* 134.0* 148.1** 157.4*** 168.8***

WPI Inflation (%) 6.82 7.48 0.71 -41.0 10.5 6.30 7.20

Source:RBI Bulletin March 2009; WSS: December 28, 2012 * November 2010 ** November 2011

***November 2012

-50.00

-40.00

-30.00

-20.00

-10.00

0.00

10.00

20.00

30.00

40.00

Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Nov-12

Money Supply vs. Inflation (% change)

M 3( %) : C ha ng e W PI In fl at io n (% )

1 During the Year 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 Nov-12

Exports (US $ Million) 103,091 126,361 163,132 185,295 178,751 251,136 303,719 22,300

Imports (US $ Million) 149,166 185,749 251,654 303,696 288,373 369,769 488,640 41,587

Trade Balance(US $ Million) (46,075) (59,388) (88,522) (118,401) (109,621) (118,633) (184,922) (19,287)

Source: Ministry of Commerce

(300,000)

(200,000)

(100,000)

-

100,000

200,000

300,000

400,000

500,000

600,000

2005-06 2006-07 2007-08 2008-092009-102010-11 2011-12 Nov-12

Foreign Trade (US$ million)

Exports(US $Million)

Imports(US $

Million)

TradeBalance(US $Million)


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13

Dec'11 Nov'11 Oct'11 Dec '12 Nov '12 Oct'12

Rs/ US$ 53.27 52.16 48.87 54.78 54.53 54.12

Rs/ Pound 82.10 81.28 78.11 88.51 87.48 87.08

Rs/ Euro 68.90 69.47 68.36 72.26 70.89 70.15

Figures are for month-end

2011-12 2012-13

20

40

60

80

100

Dec '11 Nov '11 Oct '11 Dec '12 Nov '12 Oct '12

Exchange RateRs/US$

Rs/Pound

Rs/Euro

December BSE BSE

2012 Sensex Turnover

Close (Rs.crore)30-Nov-12 19,339.90 2965

3 19,305.32 2471

4 19,348.12 2940

5 19,391.86 2886

6 19,486.80 2908

7 19,424.10 2908

10 19,409.69 2296

11 19,387.14 2614

12 19,355.26 2825

13 19,229.26 2828

14 19,317.25 2425

17 19,244.42 2466

18 19,364.75 3066

19 19,476.00 2519

20 19,453.92 2437

21 19,242.00 2226

24 19,255.09 1647

26 19,417.46 2411

27 19,323.80 2520

28 19,444.84 2204

31 19,426.71 1782

0

2000

4000

6000

0.00

4000.00

8000.00

12000.00

16000.00

20000.00

412433 4 5 6 7 10 1 1 13 1 4 17 18 1 9 20 2 1 22 24 2 6 27 2 9 30

BSET

urnover

BSESensex

December 2012

BSE Sensex vs. BSE Turnover (Rs cr.)

BSE Sensex Close BSE Turnover


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Annexure 1 : Select International Economic Indicators for Developed Industrialised Countries And India

Country Interest rates, % Consumer prices Currency unit per US $ Union Budget Real Rate Currency Current account Balance Col 8 as10-year gov't Latest As on A Year (+) / (-) (Long-term) unit per Euro latest 12 months Percentagebonds latest 12.12.2012 ago % of GDP 2012 (1-2) 12.12.2012 (US$ bn) of GDP 2012

1 2 3 4 5 6 7 8 9

Euro-11 1.34 2.2 0.77 0.76 -3.4 -0.86 1.00 96.4 0.9

Nov Sep

U. S. A. 1.70 2.2 1.00 1.00 -7.0 -0.50 1.30 -477.8 -3.0

Oct Q2

Britain 1.76 2.7 0.62 0.64 -7.9 -0.94 0.81 -88.0 -3.2

Oct Q2

Japan 0.70 -0.4 82.90 77.80 -9.7 1.10 107.66 69.4 1.0

Oct Oct

Sweden 1.45 0.40 6.65 6.85 -0.1 1.05 8.64 36.3 6.5

Oct Q3

Switzerland 0.50 -0.3 0.93 0.93 0.0 0.80 1.21 78.0 12.0

Nov Q2

India 8.18 9.9 54.30 52.90 -6.0 -1.72 70.52 -77.1 -4.3

Nov Q2

Source : The Economist London: December 15th - 21st, 2012

Annexure 2 : Important Economic Indicators for Select Emerging Market Countries

Country Interest rates, % Consumer prices Currency unit per US $ Union Budget Real Rate Currency Current account Balance Col 8 as

10-year gov't Latest As on A Year (+) / (-) (Long-term) unit per Euro latest 12 months Percentage

bonds latest 12.12.2012 ago % of GDP 2012 (1-2) 12.12.2012 (US$ bn) of GDP 2012

1 2 3 4 5 6 7 8 9

China 3.27 2.0 6.25 6.36 -2.3 1.27 8.12 208.3 2.7

Nov Q3

Hongkong 0.63 3.8 7.75 7.78 1.1 -3.17 10.06 8.7 7.0

Oct Q2

Indonesia 0.00 4.3 9,630.00 9,050.00 -2.5 -4.30 12,506.49 -18.5 -2.3

Nov Q3

Malaysia 3.49 1.3 3.05 3.16 -4.7 2.19 3.96 19.1 6.8

Oct Q3

Singapore 1.30 4.0 1.22 1.30 1.1 -2.70 1.58 46.0 14.9

Oct Q3South Korea 3.10 1.6 1,075.00 1,147.00 2.1 1.50 1,396.10 41.3 2.1

Nov Oct

Taiwan 1.15 1.6 29.10 30.20 -2.7 -0.45 37.79 45.7 9.1

Nov Q3

Thailand 3.62 2.7 30.60 30.90 -4.0 0.92 39.74 2.3 -0.1

Nov Q3

Brazil 9.11 5.5 2.08 1.84 -2.5 3.61 2.70 -52.2 -2.7

Nov Oct

Venezuela 10.05 18.0 4.29 4.29 -14.7 -7.95 5.57 17.1 5.3

Nov Q3

India 8.18 9.9 54.30 52.90 -6.0 -1.72 70.52 -77.1 -4.3

Nov Q2

Source : The Economist London: December 15th - 21st, 2012

The Research GroupMega Ace Consultancy [India] Private Limited,

B-68, Mittal Tower, Nariman Point, Mumbai 400 021Tel: +91-22-2281 2298

Fax: +91-22-2281 2305

Url: www.mega-ace.comFor research queries contact [email protected] 2013

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Update on Indian Economy, January 2013